Consolidation in the LTL Industry

Consolidation in the LTL Industry SMC 3 Summer Meeting June 17, 2004

Consolidation in the LTL Industry Contents Merger & Acquisition Overview LTL Consolidation Carrier Impact Shipper Impact Critical Success Factors 2

Merger & Acquisition Overview Merger/acquisition announcements make big headlines Recent M&A Bids Comcast s bid for Disney JP Morgan s bid for Bank One Cingular s bid for AT&T Wireless Oracle s bid for PeopleSoft 3

Merger & Acquisition Overview When successful, M&A transactions can bring considerable benefits Revenue Benefits New markets New products Improved revenue mix Costs Benefits Improved asset utilization Operating efficiencies Decreased back-office/ administrative costs Increased buying scale 4

Merger & Acquisition Overview Bank One grew from a community bank in Columbus, OH to a banking leader during the late 1980 s and 1990 s $40 Geographic expansion through acquisitions Adding new services (e.g., credit cards) Stock Price $35 $30 $25 $20 $15 $10 $5 $0 Dec- 87 Dec- 88 Dec- 89 Dec- 90 Dec- 91 Dec- 92 Dec- 93 Dec- 94 Dec- 95 Dec- 96 Dec- 97 Sources: Yahoo Finance, Hoovers 5

Merger & Acquisition Overview Tyco became a conglomerate with $35 billion in annual revenue through serial acquisitions 1997 1998 1999 ADT ($6.6 b) AT&T s submarine cable unit Keystone Intl. (industrial valves) Wells Fargo s alarm business United States Surgical (surgical products) AMP (electrical and electronic connectors) Raychem (electronic components) Source: Hoovers 6

Merger & Acquisition Overview And achieved strong stock price growth during the period $60 $50 Stock Price $40 $30 $20 $10 $0 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Source: Yahoo Finance 7

Merger & Acquisition Overview However, expected benefits are not always achieved Flawed Synergy Assumptions Market opportunities Cost savings Integration Complexity Sales & Marketing Operations People/culture 8

Merger & Acquisition Overview It is estimated that more than half of business combinations fail to produce value Value from Mergers Destroyed Value 53% Added Value 17% Neutral 30% M&A failure rate of 60% to 70% (Chairman, Bain & Co.) M&A failure rate of 60% to 80% (CEO A.T. Kearney) Source: KPMG, 1999 9

Merger & Acquisition Overview AOL/Time Warner has suffered through considerable turmoil since their merger $166 Billion Merger Announced CEO Gerald Levin Retires Company Reports $45b Quarterly Loss 2000 2001 2002 2003 2004 AOL/TW Merger Approved COO Bob Pittman Resigns Chairman Steve Case Steps Down AOL dropped from name 10

Merger & Acquisition Overview AOL/Time Warner s stock price has suffered as well $80 $70 $60 Stock Price $50 $40 $30 $20 $10 $0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Source: Yahoo Finance 11

Merger & Acquisition Overview The Daimler Benz - Chrysler merger has also not achieved the benefits expected from the global marriage of auto makers $90 $80 $70 Stock Price $60 $50 $40 $30 $20 $10 $0 Oct- 98 Apr- 99 Oct- 99 Apr- 00 Oct- 00 Apr- 01 Oct- 01 Apr- 02 Oct- 02 Apr- 03 Oct- 03 Apr- 04 Source: Yahoo Finance 12

Consolidation in the LTL Industry Contents Merger & Acquisition Overview LTL Consolidation Carrier Impact Shipper Impact Critical Success Factors 13

LTL Consolidation As the U.S. economy recovers, strong freight volume is benefiting LTL carriers Fuel Insurance Economic Recovery HOS Impacts Interest Rates 14

LTL Consolidation And is driving improved carrier stock performance this year Source: BigCharts.com 15

LTL Consolidation Continued growth is important for above-average stock appreciation Impact of Growth on Shareholder Value Market Value Annual Growth 20% 16% 12% 8% 4% 0% Shrinking Unprofitable Growth Cost Cutting Profitable Growth Source: Grow to be Great 1995 16

LTL Consolidation Bigger may mean better Operating Ratio to Size* 110% 105% Operating Ratio 100% 95% 90% 85% 80% $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 Revenue (Millions) But is this really true or just a function of the smallest carriers? *All LTL carriers reporting with the DOT in 2000 Source: ATA Motor Carrier Annual Report, 2000 data 17

LTL Consolidation The benefits may still hold when carriers under $100M are removed from the analysis Operating Ratio to Size* Regional and Multi-Regional Carriers 100% Operating Ratio 95% 90% 85% $- $400 $800 $1,200 $1,600 $2,000 Revenue (Millions) *Regional/multi-regional carriers with $100 million or greater in revenue reporting with the DOT in 2000 Source: ATA Motor Carrier Annual Report, 2000 data 18

LTL Consolidation This may be due to a cost advantage for larger LTL carriers 250,000 Operating Cost/Employee by Size* Operating Cost/Employee 200,000 150,000 100,000 50,000 - $- $500 $1,000 $1,500 $2,000 Revenue (Millions) *Regional/multi-regional carriers with $75 million or greater in revenue reporting with the DOT in 2000 Source: ATA Motor Carrier Annual Report, 2000 data 19

LTL Consolidation Carriers can grow either organically through internal growth or through acquisitions Internal Growt h Acquisition Low risk op erationally High ris k competitively Low risk co mpetitively High ris k operationally 20

LTL Consolidation Within the LTL industry, there are 2 general types of consolidation opportunities Side-By-Side End-To-End + + Gain operating efficiency Generally costdriven Open new markets Generally service-driven 21

LTL Consolidation Mergers that are successfully executed will challenge competing carriers Characteristic Service Offering Cost Structure Profit Impact Competitive Position Merged Carrier Improved Lower cost Improved or gain share Improved vs. regional competitors New entrant in crossregion market Competing Carriers No change No change No change or decreased Regionals: Worse vs. merged carrier Cross-region: Worse due to new entrant 22

Consolidation in the LTL Industry Contents Merger & Acquisition Overview LTL Consolidation Carrier Impact - Side-by-Side Consolidation - End-to-End Consolidation Shipper Impact Critical Success Factors 23

Carrier Impact Side-by-Side Consolidation Side-by-side combinations can provide significant cost reduction benefits Potential Cost Benefits Increased Density Benefits Back-Office Benefits Improved terminal efficiency Improved equipment utilization Improved line haul efficiency Increased capacity Decreased administrative cost Improved purchasing power 24

Carrier Impact Side-by-Side Consolidation Service benefits from a side-by-side combination are driven by increased density Potential Service Benefits Increased Density Benefits Greater geographic area for 1-day or 2-day service Improved service to midsized or small cities where density is gained 25

Carrier Impact Side-by-Side Consolidation Princeton Optimization ran an LTL Side-by-Side merger scenario Example Terminal Operating Savings (per Day) Bill Count Total Loads Primary Direct Head Loads Acquiring Carrier 250 19 16 3 5 Acquired Carrier 125 9 8 1 2 Source: Princeton Optimization Inc. 26

Carrier Impact Side-by-Side Consolidation Acquiring Carrier: North Carolina Terminal Source: Princeton Optimization Inc. 27

Carrier Impact Side-by-Side Consolidation Merged Carrier: North Carolina Terminal Source: Princeton Optimization Inc. 28

Carrier Impact Side-by-Side Consolidation The networks are similar because we went from 19 daily loads Source: Princeton Optimization Inc. 29 Total Loads = 19

Carrier Impact Side-by-Side Consolidation To only 24 loads, with more direct and head loads Source: Princeton Optimization Inc. 30 Total Loads = 24

Carrier Impact Side-by-Side Consolidation Merger Benefits to Acquiring Carrier Financial Benefits 50% Revenue 20% Costs Operating Benefits 26% Loads 31 200% Directs 20% Head Loads

Carrier Impact Side-by-Side Consolidation Improved revenue mix comes from improved service offerings, not a decrease in the number of carriers Revenue Mix Benefit Decrease in number of competing carriers Decrease in industry capacity Improved service offering Improved capabilities to service customers Broader customer base 32

Carrier Impact Side-by-Side Consolidation Yellow Roadway achieved improved financial performance in its first quarter as a merged company 1Q 2004 Performance LTL Revenue (Billions) $1.6 $1.5 $1.4 Revenue Operating Ratio 98% 97% 96% LTL Operating Ratio $1.3 1Q 2003 1Q 2004 *LTL business only Source: Yellow Roadway First Quarter, 2004 Press Release 33 95%

Consolidation in the LTL Industry Contents Merger & Acquisition Overview LTL Consolidation Carrier Impact - Side-by-Side Consolidation - End-to-End Consolidation Shipper Impact Critical Success Factors 34

Carrier Impact End-to-End Consolidation End-to-end combinations can improve a company s service offerings Potential Service Benefits New Service Increased Density Benefits Larger service territory Increased number of lanes Greater geographic area for 1-day or 2-day service Improved service to mid-sized or small cities where density is gained 35

Carrier Impact End-to-End Consolidation A secondary benefit of an end-to-end combination can be decreased costs Potential Cost Benefits Increased Density Benefits Improved flowing of traffic over the existing regional networks Fewer intermediate handlings Back- Office Benefits Decreased administrative cost Improved purchasing power 36

Carrier Impact End-to-End Consolidation FedEx Freight has successfully grown following the AF acquisition, even during the slow economy $14 Performance Revenue/CWT Operating Ratio 94% Revenue/CWT $13 $12 93% 92% Operating Ratio $11 2001* 2002 2003 91% *Fiscal Year 2001 did not include a full year of FedEx Freight East performance Source: FedEx SEC Filings and Annual Report 37

Carrier Impact End-to-End Consolidation SCS is lowering its operating ratio while integrating several carriers acquired during the 1999 2001 period 100% Operating Ratio* 98% 96% 94% 92% 90% 1998 1999 2000 2001 2002 2003 *Annual O.R.s include performance of separate carriers prior to being acquired Sources: SCS financial filings; ATA Motor Carrier Annual Report, 1998-2000 data 38

Carrier Impact End-to-End Consolidation Other LTL industry deals did not result in the intended benefits Ryder PIE Helms Burns ANR Con-Way Penn Yan End-to-end Great strategic fit Operational combination failed Side-by-side deal No longer in business 3-way end-to-end deal Company went bankrupt End-to-end deal Penn Yan was liquidated 39

Consolidation in the LTL Industry Contents Merger & Acquisition Overview LTL Consolidation Carrier Impact Shipper Impact Critical Success Factors 40

Shipper Impact There is plenty of opportunity for consolidation in the regional and multi-regional marketplace Estimated Regional/Multi-Regional LTL Market Share* ConWay 8% FedEx Freight 8% USFC 7% Overnite 5% All Other 57% AAA Cooper 2% SEFL 2% SCS 3% Estes/GI 4% ODFL 2% Averitt 2% *Based on Stephens Inc. estimate of $27 billion in regional LTL revenue 41

Shipper Impact Going forward, there may be more limited consolidation within the long-haul LTL segment Estimated Long-Haul LTL Market Share* All Other 25% Watkins 8% ABF 17% Yellow Roadway 50% *Based on Stephens Inc. estimate of $12 billion in long-haul revenue 42

Shipper Impact Shippers should benefit from service improvements following consolidation TODAY Many carriers with: Limited service Limited capabilities PREFERRED Fewer carriers with: Broad service offerings Strong capabilities 43

Shipper Impact Consolidation among regional/multi-regionals won t eliminate competition, and could actually lower shipper rates SE Region Carriers AAA Cooper Averitt CWS SCS - SAIA Estes FedEx Freight East ODFL Overnite R&L SEMF USF Dugan Consolidation Impact on Shipper Rates Competitive rates with 1/2 as many carriers Carriers with lower costs Fewer expensive 1-off shipments 44

Consolidation in the LTL Industry Contents Merger & Acquisition Overview LTL Consolidation Carrier Impact Shipper Impact Critical Success Factors 45

Critical Success Factors How does a merged company ensure that the pieces of the puzzle fit together properly? 46

Critical Success Factors Successful mergers are well conceived, Assess merger fit with company strategy Compare merger to other options Understand the potential synergies - Revenue enhancement - Cost take-out 47

Critical Success Factors well planned, Assess potential merger partners - Network - Synergies - Culture Analyze potential competitor responses Difficult Ease of Integration Insurance Inventory Management Plan the postmerger integration Sales Force Purchasing Illustrative Easy Small Systems Benefits Large 48

Critical Success Factors and executed according to the plan Difficult Illustrative Ease of Integration Inventory Management Insurance Sales Force Purchasing Easy Small Systems Benefits Large Task Identify Best Practices Identify Impact on Suppliers Communicate with Suppliers Implement System Changes Implement Process Changes Week 1 2 3 4 5 6 7 49